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A short micro essay for application to university

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What sort of economic policies, if any, should governments introduce to limit the consequences of environmental damage?
Economic policies introduced to combat environmental problems centre around the concepts of externalities and market failure.
An externality is a spill-over effect that affects those not directly involved in making that particular decision. In this case, the focus would be on negative externalities where the social costs are greater than the private costs. The price paid is therefore lower than it should be, and over production due to allocative inefficiency occurs. To combat the intensifying environmental problem, governments can impose policies such as ‘polluter pays principle’, and tradable environmental permits.
Firstly, the ideology behind ‘polluter pays principle’ is based upon fairness, as it is an unjustifiable act to exploit non-renewable resources for profit, while leaving the cost incurred to the general public or at the cost of sustainable development for future generations. Waste disposal fees, severance taxes on rare resources and taxes on handling the discharge of hazardous chemical wastes are examples of taxes based on this principle.
In an ideal world, taxation would be a good enough deterrence for firms to terminate the excessive pollution. However, the London-based consultancy Trucost published a study which found the cost of damage to the environment by the business sector alone amounted up to £1.4tn in 2008, a figure higher than the GDP of the majority of countries around the globe. This estimate accounted for more than half of the greenhouse gas emissions blamed for global warming. Nevertheless, the figure is believed to be an understatement of the actual situation, due to the existence of hidden economies and the complexity involved in putting a value on the damage done accurately.
One of the reasons behind the ineffectiveness of the taxes is lack of regulations to reinforce the tax system. Billions of dollars worth of subsidies to harmful industries such as transport and energy encourage the poor management of natural resource usage. It is not only in the general population’s interest to improve the efficiency of resource management, as well as to the firms themselves. For example, last year water shortages in California resulted in loss of 20,000 jobs and US$1bn.
Secondly, the overall pollution level can be controlled by the number of permits distributed. As it is a market-based solution, depending on the market forces and the fact that not all firms would use up their allotted amount, the pollution level will always be lower than the projected value. For example, the EU’s Emissions Trading Scheme covers pollutants such as carbon emissions. The Kyoto Protocol, signed by 169 countries, signifies the growing concern of global warming on many government’s agenda.
However, is this a good way to minimise pollution? The incentives ...